MILAN, Aug 28 (Reuters) - Italy is planning legislation to
prise hundreds of public utilities from the control of local
authorities in a move toward consolidating a highly fragmented
sector to create big, national companies, according to ministry
sources and draft documents.

On Friday the centre-left government of Matteo Renzi is set
to announce a package of measures aimed at shoring up some of
the weakest points of Italy's sluggish economy.

The measures are likely to include financial incentives for
public owners to sell stakes in utilities and other local
service companies, according to draft proposals seen by Reuters.

Italy has more than 8,000 service companies controlled by
city and regional governments, including around 1,500 local
utilities. Renzi recently said he wanted to see the 8,000
service companies cut back to around 1,000.

"The aim is clear - Rome intends to send a strong message
that these small utilities need to be privatised or merged into
bigger players," a top industry source who has seen the draft
proposals said.

The package, which still need a final blessing from the
cabinet, will be included in a decree that must be approved by
parliament within 60 days.

One proposal will call on the owners of public waste
management companies to list at least 60 percent of capital on
the stock market or sell a minority stake to an industrial
partner, a ministry source said.

Smaller utilities will be encouraged to merge with larger
players to create companies that have the critical mass to
compete, especially in the water sector, according to draft
proposals seen.

It was not clear from the draft proposals whether foreign
companies would be encouraged or allowed to take controlling
stakes. But some big firms such as GDF Suez have
expressed an interest in parts of the Italian utilities market.

France's EDF already owns Italy's No. 2 power
utility Edison and some analysts have said they could be
interested in expanding further.

To promote mergers the government is expected to offer city
and regional owners a series of incentives including approval to
use the proceeds from any stake sale for local investments.

One of the sources told Reuters the government was keen for
smaller utilities to merge with bigger regional multi-utilities
such as A2A, Hera and Acea.

Bologna-based Hera has made a series of acquisitions in
recent years in Italy's affluent north-east, while top regional
player A2A has interests outside Italy, including 43.7 percent
of Montenegrin power utility EPCG.

"Rome wants to get rid of small inefficient players and bulk
up bigger regional operators, and to help fund the whole
process, it's mulling bringing onboard state-owned investment
funds like Fondo per lo Sviluppo e la Coesione (The Fund for
Cohesion and Development)," the industry source said.

Friday's decree could also include measures to boost
investment in domestic oil and gas exploration by offering
regional governments a share of royalties, a second ministry
source said.

The government is looking to double domestic oil and gas
production in an effort to cut energy import costs and boost
supply security.
(additional reporting by Giulio Piovaccari; editing by Jane
Baird and Keiron Henderson)